Each year, the IRS lists their “dirty dozen” of tax scams.
- Phishing is a scam where criminals attempt to steal your identity and financial information. You may get an email from someone purportedly from the IRS. If you get something like that, don’t believe them! The IRS won’t email you.
- Phone Scams. Instead of emails, a phone scam is one in which you get a call out of the blue from a supposed IRS agent who is ready to do something dire unless you buy some gift cards for the caller or arrange to meet them with cash. A friend of mine is from Colombia (now an American citizen) and speaks with an accent. As soon as the caller heard the accent, it switched from an IRS tax issue that threatened to seize assets to an IRS tax issue that threatened deportation of him and his family. (They are legally in the US). These guys play on your fears. And it’s a scam.
- Identity Theft. A client of mine was part of the Home Depot identity theft years ago. They still have problems each year with their tax returns. Someone else files their return very early in the season and attempts to get a full refund of the amount paid. When they file their return (which is complicated because they have a number of investments, own real estate and multiple businesses), they have to prove who they are to the IRS. This is just part of life in our more tech world, I fear.
- Return Preparer Fraud. It’s rare to find a CPA or tax attorney who engages in this, they have just too much at risk. But you do find people who set up temporary tax prep offices during tax season and then prepare returns, but don’t have any credentials beyond just saying they know how to do the work.
- Fake Charities. If someone wants your money and says they are a charity, check them out first. That’s especially true if they ask for any personal information like your social security number.
- Inflated Refund Claims. The biggest culprit here is the Earned Income Tax Credit. It is a refundable credit, which means that you can receive more in a refund than you paid in taxes. It also means easy pickings for con artists who inflate things like number of children and decrease the amount of reportable income.
- Excessive Claims for Business Credits. This was a new one for me. Apparently people are reporting too much off-highway use for vehicles (primarily for farming) in order to get the fuel tax credit.
- Padding Deductions on Returns. This one has been around as long as there has been tax prep. People report deductions that aren’t legitimate.
- Increasing Income. This one might not be intuitive at first glance. Underreporting income makes sense. But increasing the amount you report? It all goes back to the EITC. In order to claim it, you have to have earned income. There is a sweet spot of earned income that gives you the best refund.
- Frivolous Tax Arguments. Don’t be ridiculous. In fact, if you are with the IRS, they’re going to hit you with a penalty.
- Abusive Tax Shelters. Most likely this occurs with trusts and just by definition, are schemes promoted by “advisors” who charge big fees in order to set up complicated multiple company arrangements with huge promises. Talk to someone reputable before you fall for that.
- Offshore Tax Avoidance. You may not owe taxes on your offshore accounts, but you still need to report their existence. If you don’t, you are looking at big penalties.
You can sum these up best with just a few statements. Be careful who gets your personal information. Don’t fall for phone for email scams. Don’t try to get sneaky with your tax returns. If you want to find legal ways to pay less tax, consider our twice monthly coaching program. In April, we’re focusing on the new pass-through income reduction for both real estate owners and business owners.